Arbitrage Equilibrium Limits

Arbitrage equilibrium limits refer to the theoretical and practical boundaries where the cost of executing an arbitrage strategy exceeds the potential profit from price discrepancies between markets. In cryptocurrency and derivatives, these limits are defined by transaction fees, slippage, latency, and capital constraints.

When price differences between two exchanges or instruments fall within these transaction costs, market participants have no incentive to trade, leaving the price gap open. This state represents a zone of inaction where market forces are insufficient to restore price parity.

These limits are not static and shift based on network congestion, liquidity depth, and volatility. Effectively, they define the range of price inefficiency that the market tolerates before arbitrageurs intervene.

Understanding these limits is essential for grasping why price anomalies persist in decentralized finance.